Thai Central Bank Chief Says Independence Key to its Credibility

Prasarn Trairatvorakul, governor of the Bank of Thailand, in Sydney, Australia, on Feb. 20, 2014.

Bloomberg News

Central bank independence is a thorny topic in many countries. After Thailand’s armed forces grabbed power in a coup last month, speculation over whether they would enlist the country’s central bank into their campaign to boost the economy quickly spread.

Would the Bank of Thailand cut interest rat: s? Would there be new measures to support or weaken its currency?

In short, would the Bank of Thailand be left alone to diagnose what’s wrong with Thailand’s sputtering economy and figure out the right medicine?

Well, the central bank’s governor Prasarn Trairatvorakul says that so far it isn’t coming under that kind of pressure, but left a veiled warning that the country’s military rulers shouldn’t let it happen, either.

Late Thursday, he told the Foreign Correspondents’ Club of Thailand that the independence of the bank’s monetary policy committee was the reason the bank has been able to build up its credibility over the past decade. “The institutional setup must continue to protect this independence, so that monetary policy can remain a cornerstone of Thailand’s macroeconomic stability,” Mr. Prasarn said. “The monetary policy committee is aware that our operational independence would mean little in the absence of public trust….It is ultimately the very source of our credibility.”

The Bank of Thailand is prickly about any perceived threat to its independence. It has worked hard to regain its credibility in policy-making circles since the blow-out years of the 1990s, when reckless foreign lending eventually forced a sharp devaluation of Thailand’s currency, the baht, in 1997. That helped trigger a wave of other devaluations around the region that later became known as the Asian financial crisis.

More recently, the Bank of Thailand has acquired a reputation of being among Asia’s most hawkish central banks. At its latest policy meeting in June, it left its main policy rate unchanged at 2% despite a desperately weak economy. In the first quarter of the year, gross domestic product shrank 2.1% from the previous period as wave after wave of political protests paralyzed much of Bangkok and scared off tourists and investment.

The demonstrations were part of a near-decade long political battle for power between rural-backed elected governments and the conservative middle classes and establishment in Bangkok, who worried over the populism taking hold of the country. For months, Thailand was without a functioning government and budget and spending plans were in stasis. Mr. Prasarn likened the situation to a Thai-style version of the fiscal cliff in the U.S.

The coup, or rather, “the incident,” as Mr. Prasarn prefers to call it, helped clear the air, at least in economic terms.

“The presence of a fully functioning government ensures that the budget for the 2015 fiscal year could be prepared on time,” Mr. Prasarn said. “An acceleration of public disbursement in the short term is also providing a welcome boost to the economy. Plans for public investment in infrastructure are now back on track, and there have been renewed efforts to maximize the efficiency of these projects.”

The Bank of Thailand now expects growth rates to hit 1.5% this year. That’s sharply off long-term potential growth rates of 4% to 5%, but in the context of the steep contraction earlier this year, that passes for a quick “V-shaped” recovery, Mr. Prasarn said.

If he’s right, that might be all the more reason to resist any pressure to cut rates.

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